In the beginning of a 1031 deferred exchange, when the closing of the relinquished property occurs, the title company or escrow closing company typically has the responsibility to report the seller/exchangor’s disposition to the IRS on a IRS Form 1099-S. This is to ensure that the IRS will have a record of the transaction.
Reporting the Transaction on Form 1099
This often brings raises several questions among the title company or escrow closing company, such as:
- How do we report the seller/exchangor’s transaction on the 1099?
- Should we indicate that the seller will receive property as part of an “exchange” in box #4, since the seller/exchangor’s will likely be exchanging into another property?
According to the IRS instructions, Box #4 is for when the seller receives something other than cash or cash-equivalent as part of the consideration paid for the relinquished property.
Generally, in a 1031 exchange the only consideration paid is “cash,” and that goes to the seller/exchangor’s qualified intermediary, so Box #4 would typically not be applicable. However, if the transaction involves other non-cash payments from the buyer, such as a promissory note, property or services rendered as partial consideration/payment for the purchased property, then Box #4 would be have to be checked.
For more information on 1099 reporting requirements, check out our previous article.
- 1031 Hotline: If you have questions about 1099 reporting when it comes to 1031 exchanges, feel free to call me at 612-643-1031.
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